Could a well-service company buy consumed supplies and permanently installed guyline anchors tax free for resale?

Plain-English summary

A well-service company asked about two kinds of property: supplies consumed while maintaining an existing well and permanent guyline anchors installed at well sites.

Consumable supplies were taxable to the service company. It could not issue a resale certificate for materials used up while performing its service, even when it separately charged those costs back to the well owner.

Permanently installed guyline anchors were improvements to real property, making the installer a contractor. Under a separated contract, labor was not taxable and the separately agreed materials price could not be less than the contractor's cost. Under a lump-sum contract, the contractor had to pay tax on all job materials, including incorporated materials, while the lump-sum price charged to the customer was not taxable.

What this means for you

Well-service companies

Passing a consumed supply cost through to the customer did not make the supply a resale item. The company remained the taxable consumer.

Contractors installing anchors

Permanent attachment to the well site moved the anchors into the real-property contractor rules. Contract structure then controlled who paid tax and which customer charges were taxable.

Common questions

Could consumable well-service supplies be bought with a resale certificate? No, even when charged back to the well owner.

Why were the guyline anchors treated differently? They were permanently installed and therefore constituted improvements to realty.

How did a separated contract work? Labor was not taxable, and the separately agreed materials amount could not be less than the contractor's cost.

How did a lump-sum contract work? The contractor paid tax on all materials, and the lump-sum customer charge was not taxable.

Citations and references

The letter cited no specific statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1173D01

Original ruling text

February 28, 1992

Dear **:

Thank you for your recent letter asking about the taxability in the two
situations you described. I have restated the two situations with responses
below:

Situation #1: ** is called out for maintenance service on an
existing well. In the process of this service, we will use up supplies that are
necessary and customary for the proper servicing of the well. These supplies
are charged back to the well owner. They are not left with the well owner as
they are "used up."

Question: Am I allowed to purchase these supplies as resale items and therefore
tax exempt?

Response: Consumable supplies, meaning supplies that are used up or consumed in
providing your service, are taxable to you. You may not issue a resale
certificate for consumable supplies even though the supplies are charged back
to the well owner.

Situation #2: ** also installs permanent guyline anchors on well
sites. This is a permanent fixture to the well site and is charged back to the
well owner.

Question: I allowed to purchase these items as resale and therefore tax exempt?

Response: Permanently installed guyline anchors at well sites constitute
improvements to realty. Therefore, when you install such anchors, you are
acting as a contractor. Under a separated contract (separately agreed upon
contract price for labor and incorporated materials), you may purchase the
incorporated materials, which may not be less than your cost. The labor charge
is not taxable. Under a lump-sum contract, you must pay tax on all materials
used on the job, including the incorporated materials. The lump-sum contract
price is not taxable to the customer.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any additional questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division